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FHA Strong Enough for MIP Cut?

Is now a good time for FHA to reduce hurdles to homeownership with a lower mortgage insurance premium? NAR says yes, but the Trump administration and some members of Congress aren’t so sure. On Inauguration Day, the U.S. Department of Housing and Urban Development suspended a planned reduction in the FHA premium saying in a letter to mortgage lenders that “more analysis and research are deemed necessary.”

The quarter-point reduction had been announced in the waning days of the Obama administration and was scheduled to go into effect on Jan. 27, 2017. It would have been the second premium reduction in two years, after five successive increases in the MIP, starting in 2010, put in place to shore up FHA’s flagging reserve fund.

During the housing crisis, higher-than-normal defaults drove the agency’s reserve fund below the congressionally mandated 2 percent. According to that mandate, the agency must have excess reserves of 2 percent in its mutual mortgage insurance fund to cover short-term losses in its portfolio. That’s over and above the 30 years of reserves FHA maintains on all the insurance in force in the fund. The requirement is much higher than the reserve requirement for private lenders. By January 2015, when FHA reduced the MIP by more than 35 percent, the excess reserve was back above 2 percent. It’s now above 2.3 percent.

Not everyone sees a healthier reserve fund as justification for lowering the premium. Rep. Jeb Hensarling (R-Texas), chair of the House Financial Services Committee, supported the suspension, saying that lowering the MIP “was a big mistake.”

Hensarling cited an analysis of HUD data by the Mortgage Bankers Association that found a 72-basis-point jump in 30-day delinquencies in December 2016.

But that concern is probably overblown, says Brian Chappelle, a Washington-based mortgage policy consultant. Taking the fourth quarter as a whole, the spike in delinquencies was 55 basis points, according to MBA, with no year-over-year increase. Plus, the agency’s latest data show delinquencies already heading back down.

In January, compared to the previous month, 30-day delinquencies were down by 31 percent, serious delinquencies by 2 percent, and total delinquencies by 38 percent, according a review Chappelle’s firm did on the agency’s performance data.

“The fundamental good news is, the serious delinquency rate is not volatile and it’s been steadily declining for the last five years,” Chappelle says.

He attributes much of the bump in short-term delinquencies last quarter to the typical snags that bedevil borrowers at year-end, including changes in servicers, which can lead to late payments, and holiday spending. “Short-term delinquencies are always more volatile,” Chappelle says. What’s more, historical trends suggest delinquencies will continue improving in the near-term.

“In the first quarter, delinquencies always go down,” he says. Last year, for example, delinquencies fell almost 140 basis points in the first three months, and there’s a good chance that will be repeated. That’s because 90 percent of the FHA portfolio is loans made since 2009, a period in which the average credit score of borrowers was 680, well above FHA’s minimum credit score of 580.

Chappelle’s analysis bolsters NAR’s position that a premium reduction is justified.

The planned quarter-point decrease would have saved buyers an average of $500 a year, reducing costs for 750,000 to 850,000 homebuyers, NAR President Bill Brown said in a Jan. 30 letter to Ben Carson, the Trump administration’s HUD secretary nominee. In the letter, Brown said suspension of the premium reduction had created uncertainty and confusion for borrowers, sellers, lenders, and underwriters.

Private mortgage insurers have opposed the MIP reduction on the grounds that it makes their products less competitive. Had the reduction gone into effect, it would have brought FHA premiums down nearly to their 2010 levels.

Contact San Ramon mortgage broker for help with FHA loans and other home mortgage refinance.